Monday, November 26, 2007

More out of curiosity than anything else, I made a few inquiries regarding the property which is the subject of the most recent unsolicited offer.

I was more than mildly surprised to receive a bank valuation (which should be quite conservative) which was 16% higher than the unsolicited offer. I ran the numbers through the spread sheet and came up with an IRR of 42.6% if I sold at the bank valuation and 23.0% if I sold at the unsolicited offer price. A big difference.

It's a good example of how well a leveraged investment can do when things go well. It's also a good example of the importance of doing your homework before making any important investment decisions. In this case, it took one e-mail to a lending officer to get the valuation.

Saturday, November 24, 2007

I received a call from a real estate agent today saying he had a firm offer for one of my properties. Leaving aside the question of where he got my mobile number and the fact that I have no interest in selling the property, the offer is at a level which indicates a solid increase in price. Although I have not kept precise records of the cash flow on the property, a rough calculation would suggest that accepting the offer would result in a realised return (net of all costs etc) on capital invested of somewhere between 21 - 24 % pa.

I'm not interested in selling for the following reasons:

1. what would I do with the money? I would just turn around and look for another property to invest in. Unless I am trading up, all I will end up doing is incurring a lot of transaction expenses;

2. I have sold one property this year already. If I make a habit of selling properties, I risk being classified as a trader for tax purposes. If that happened, I would have to pay profits taxes on all future property sales (excepting our home). Even atHong Kong's middle of the range tax rates, this is a very high cost.

I was updating some of the numbers in my balance sheet and noticed that when I adjusted one of the line item assets the total gross assets and the net assets (i.e. net worth) didn't change. When using the "sum" function I had managed to miss the last item in one column. In effect I have been understating my net worth for at least part of 2007 (probably since I purchased my last property in June). It's not a large amount (about 0.6% of net assets), but it's irritating that I have been recording and reporting inaccurate numbers for at least a few months.

Monday, November 12, 2007

My mortgages are all at floating rates. The most recent fixings have been at rates of 4.5%, 4.3% and 3.9%. In mid year most of the fixings were at or around the 5% mark. The 3.9% is very cheap money, being lower than the net yield on properties and, after adjusting for tax, is probably not far away from the genuine rate of inflation - meaning that the real cost of funds is getting close to zero.

There really is very little incentive to pay of debt early and, so long as I remain confident that asset values will rise in at least nominal terms over the medium term, considerable incentive to use leverage when investing.

Of course, the sharp declines in a number of stock markets today is as good a warning against the perils of over gearing as any.

Sunday, November 11, 2007

Hong Kong property prices have risen strongly this year. This is mostly good news as our portfolio is heavily weighted towards this sector. The decline in certain sectors of the United States housing market and the credit crunch have, so far, been almost a complete irrelevance to Hong Kong (and the rest of Asia generally).

Instead, strong economic growth, falling unemployment, rising incomes, robust stock markets, high levels of monetary liquidity, low real (and nominal) interest rates and an absence of excess supply have all contributed to give people both the means and the confidence to either enter the property market for the first time (whether as an owner occupier or an investor), to upgrade an existing home or to add to an investment portfolio.

Will these conditions (and the upward trend in prices) continue? Here are some issues:

1. China: the economic growth story in China is one of the biggest drivers of the Hong Kong economy. If China's economy slows, this may have a knock on effect for Hong Kong;

2. United States: much has been written about the declines in certain sectors of the US housing market and the sub-prime credit crunch. There has been no indication that this is having any effect whatsoever on Hong Kong;

3. Supply: supply numbers for 2008 and 2009 are generally predictable and do not show any large increase in supply;

4. Cost of Funds: interest rates are low and are as likely to fall further as to rise. It is possible to get funding on residential mortgages at around 4.5% pa. In contrast, bank deposits pay a pitiful return which is well below the rate of inflation making bank deposits a losing investment;

5. Affordability: in spite of rising prices, home ownership is still affordable (very affordable compared to the bubble of the mid 1990s). In many housing estates, it is still cheaper to own than to rent;

6. Rents: rents have risen at a much slower pace than property prices since the bottom of the market in 2003. However, they are still rising and this is a positive factor for owners of rental properties;

7. Liquidity: HIBOR fell to below 4% last week. Banks are engaged in an intensive battle for market share. There is no shortage of liquidity in Hong Kong's financial system.

There are of course other factors which can influence the direction of the property market. However, absent either a slow down in China's economic growth story or an increase in supply of new units (which would be at least three years away because of the lead time for new developments), I continue to remain optimistic about the Hong Kong property market.

Wednesday, November 07, 2007

The markets for most investments have experienced a prolonged bull market for a few years now and, like most investors, times have been good. That said, values in many markets are either expensive or, if not expensive, hardly represent a bargain. So I asked myself what assets I could identify that have been poor performers and may, just may, merit a counter cyclical investment. OK, I know that chartists and momentum investors (of which I am not one) would argue that investing against the trend is very risky but the lure of the cheap is sometimes hard to resist.

In any case, here is the list that I have come up with so far:

1. the United States Dollar: formerly the world's reserve currency, it has depreciated significantly against most developed country currencies and is being universally predicted to decline further;

2. housing prices in the United States: I don't know enough about this one to comment. Since I am not keen on the idea of investing in something that requires active management in a country where I do not live or habitually visit, this one is unlikely to be considered further;

3. natural gas: this has taken something of a hammering since June on the back of rising supply;

5. soy bean oil: a huge fall in the last few weeks. I have no idea why. Soybeans have risen;

6. sugar: generally in down trend for about a year. I have no idea why;

7. credit instruments: some of these have taken a hammering in he credit crisis. It's a highly specialised field and I'm inclined to leave this one to the professionals;

8. shares in banks and other financial institutions: I am not allowed to deal in individual shares, so this will be excluded from further analysis.

I could add items like farm land in Zimbabwe to the list, but that is a little extreme for my taste.

I'm sure there are are other unloved investments out there but items 3-6 above will serve for the purposes of my initial research. At this stage, I have not researched any of them, but it will be interesting to see what I come up with.

On Monday I purchased some put warrants on the Hang Seng Index. By the end of Monday, I was up more than 20%. Yesterday I watched about half the gains evaporate as the market rallied. This morning I took what was left of Monday's paper profits and sold the position. I ended up with a net gain of 7% in two days. This is a nice rate of return (although on a very small amount of money).

I am not sure if I want to make a habit of making short term speculations, but it was fun.

Monday, November 05, 2007

This morning I pulled the trigger and made a token investment in some put warrants (similar to put options) on the Hang Seng index. The amount involved is trivial, so win or lose it will have no noticeable effect on the overall value of my investments. At the end of the day the Hang Seng index had fallen by a touch over 5% and the warrants were up about 20%.

I accept that I am attempting to time the market which I would normally shy away from (not that it is possible to make any investment without making assumptions about the future) and I do not want to make a habit of speculating in this manner.

In one sense I am slightly irritated with myself for giving in to the temptation. In another sense, I have to remember that a warrant (option) is a wasting asset with a finite life (it expires in April). This means that I have to monitor the markets almost continually and attempt to time the exit.

Saturday, November 03, 2007

The starting point was my goal of retiring at 50 with assets that generated sufficient passive income to support our desired lifestyle (i) with a reasonable margin for error and (ii) without having to rely on draw down of capital to meet expenses.

Both 2006 and 2007 (year to date) have seen my income and savings both reach levels that were well above both budget and expectation. My periodic reviews of progress towards my goal using various retirement calculators has shown the required rate of return to achieve retirement at 50 steadily declining. It currently stands at 5.4-5.7% pa (depending on which calculator I use).

Today I looked at the numbers from a very different perspective: how soon can I retire?

If I use a 7% rate of return on investments, the answer is that I can retire at age 47 - three years ahead of schedule and less than six years away.

Why 7%? This was selected for two reasons:

(i) 7% is the aggregate of (a) the net yield after outgoings and tax on residential property and (ii) the rate of inflation. It seems to be a reasonable assumption that capital values and rents will appreciate at roughly the rate of inflation; and

(ii) 7 % is less than the long run average return on equities in most markets and also seems to be a reasonable assumption.

(To be more precise a return on investments of 6.7% pa will enable me to retire at 47.)

Of course, all this optimism is a good indicator that I am getting ahead of myself. Still, it is nice to think that retirement is less than six years away.